accelerated home loan repayments

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From: Dee Mee


I was reading in the PIA software documentation, using an IP to help someone pay off a home loan faster. I can understand this if your IP is positively geared, you could get an extra 1000-2000 per year, not a lot but better than nothing, and pay as much as you can to pay off your homeloan. After reading the example, it suggested "But an investment surplus can be generated simply by not paying the interest bill in the short term (i.e. adding or “capitalising” it into the loan) until the home loan is repaid". This generates say 10-15k per year diverted into paying the homeloan and can effectively more than halve the time taken to pay off the home loan. The disadvantage is that the I/O IP loan keeps getting bigger significantly, but this debt is tax deductable. After several years of paying down the IP you should get it back to neutrally geared / positive.

Overall you reduce the time it takes to pay off your home
this is in the linked analysis section of the pia software
what do you guys think????? What would the effect be of 2-4 IPs
do banks actually allow you to "capitalise interest" and how do you do it, do you have to do this every year

Has anyone actually used this method to pay their homeloan?
thanks
Dee

 

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Reply: 1
From: Donna Larcos


Dee Mee
Check this one with your accountant. My
accountant says capitalising interest is a
no-no, even if you have an equity loan
which allows increasing debt. However, I
have recently restructured my loans so
that I have a separate equity loan to pay
property expenses (other than interest).
Apart from interest, property expenses
that you can borrow for include rates,
levies, agent commissions, insurance,
etc. I was just paying these on my credit
card (born stupid) but now I reimburse
myself from the business equity account
and use that money to pay down personal
or home loans thereby turning
non-tax-deductible debt into
tax-deductible debt. I.E. I still owe the
same amount of money but now it's tax
deductible. I use rental income to pay
interest only and anything left I use for
personal expenses. If you have the rent
paid into your personal equity or offset
account this also reduces personal
interest payable, even if it is only in there
for two or three days.

I think there is some tax benefit if you pay
the interest up front as a lump sum and
have to borrow for that but again you must
run this by an accountant or you could
end up with a nasty tax shock in an audit.